AXA SA

PAR:CS

Earnings Call Transcript 2018-Q1

[Andrew Wallace-Barnett]

Okay. Good morning, everybody. This is Andrew. Welcome to the AXA conference call on our activity indicators for the first quarter of 2018. I'm pleased to welcome Gérald Harlin, Deputy CEO and group CFO of AXA, who will be taking you through the highlights of the first quarter and be very happy afterwards to take your questions. Gérald, I hand over to you.

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

Thank you, Andrew. So hello, and good morning to all. Thanks a lot for joining this call. AXA delivered a strong operating performance in the first quarter of 2018. We are growing our top line with total gross revenues growing by 2% at the group level. Our APE was up 5%, and our NBV was also up 5%. This overall growth was supported by continued focus towards our preferred segments, hence, revenues were up 7% with growth in all geographies. Protection APE was up 9% and P&C commercial lines revenues were up 2%.We also reported the solvency to increase up 16 points from full year '17 to 221%. Let me now take you into the details of each our geographies and starting first with AXA France.AXA France had an excellent first quarter with revenues increasing by 8%. APE was up 20% from higher sales across product lines with particularly strong growth in health plus 39% coming from growth in both in individual and international group business. Protection was up 11% from strong sales in group protection business, and Unit-Linked plus 7%. So Unit-Linked share of Individual Savings business was 43% as compared to French market at 33%. In P&C, we saw growth in Commercial lines but continue to face strong market competition in Personal lines, particularly in Motor.In Europe now, total revenues grew by 1% as we continued to see the successful business repositioning towards preferred segments. APE in Europe increased by 9% with strong growth in protection plus 17% and Unit-Linked 32%. The protection APE in Europe was -- growth was mainly driven by higher sales of semiautonomous solution in Switzerland in line with our strategy. With the transformation of our Inforce book announced last month, we will become the largest provider of semiautonomous solution for SMEs in Switzerland. Unit-Linked APE growth in Europe was driven by Italy, following a continued recovery in AXA MPS and strong sales in agency channel and by Spain due to the repositioning away from G/A Savings towards Unit-Linked. P&C revenues in Europe increased by 2%, and health revenues increased by 3%.Moving now to Asia. We continued our focus on improving businesses in China, moving away from short-term single premium products and towards regular premium. This resulted in a 45% decline in APE for China, contributing significantly to the overall increase in NBV margin for Asia, increasing 4 points to 62%. [ In this year ], NBV margin in China went up from 27% to 56%.In Japan, APE grew by 4% driven by the launch of the new Protection product. And in the rest of Asia, APE was 7% with growth in all country. The Philippines and Indonesia were up 37% and 9%, respectively, driven by growth in Protection. Thailand was up 6% from higher Unit-Linked sales, and Hong Kong was up 3% with the successful launch of the new G/A Savings product and higher Health sales.In the U.S., Life & Savings APE was up 3% from higher mutual funds advisory sales partly offset by the non-repeat of the 1Q '17 strong sales of non-GMxB variable annuity in anticipation of the implementation of the U.S. Department of Labor rule. AB revenues were up by 13% with higher average AUM mainly due to positive market developments in 2017 and improved business mix.In international, revenues were up 3%, mainly driven by good performance in Health, especially in Mexico. In AXA IM, revenues were up 1%, linked to higher average assets under management. We also had strong net inflows in our AXA IM Asian JVs and third-party clients amounting to EUR 7 billion. Now moving on to Solvency II ratio, which I -- as I mentioned earlier, was up 16 points. This increase was driven by 3 main factors: strong operating return net of accrued dividends; second, a EUR 2 billion Tier 2 debt issuance in March to finance part of the XL acquisition, plus 7 points; and last, management action to reduce equity market risk around 8 points, which is partly offset by EIOPA change in UFR and on the reference portfolio weights for the volatility adjuster. At 221%, the group is in a very strong position.So to conclude, a strong quarter with top line growth for group, an excellent quarter in France, continued growth and shifting business mix in Europe and in Asia and net inflows in AXA IM, all this with a very strong capital position with Solvency II ratio at 221%.So I'm now ready to take your question.

[Operator]

[Operator Instructions] We have a first question from Mr. Peter Eliot from Kepler Cheuvreux.

[Peter Eliot, Head of Insurance Sector Research]

I had 2 questions on the solvency please. I guess, the first one, I mean, the ratio came in quite a distance ahead of all of our expectations, so I was wondering if you could just talk us through the drivers -- quantify the drivers in a bit more detail. And you gave the 7 points from the debt issuance and the 8 points from the de-risking, but I was wondering if you'd quantify the other moving parts, in particular, the operating profits. And I mean, given that you've guided for 3 percentage points on the UFR drag, I'm guessing that was maybe a little bit lighter and maybe we can expect a lower drag on future years as well. Secondly, at the full year results, you indicated that there was a link between the position you were within your solvency target range and the position you were in the payout ratio range. I'm just wondering if you can comment on whether there's any reasons behind the recent jump in solvency ratio or indeed the announcements of the XL Group acquisition, which might change [ occupation ] of that link.

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

Okay, Peter. So first point, so let me go through the 16 points increase in Solvency II ratio. So first, we have a strong operating return. You remember that we told you that we've been expecting between 15 and 20 points, and here, obviously, we are at the high end of the range at 20% equivalent. So that's on a yearly basis. Second, that's a EUR 2 billion Tier 2 debt issuance. You notice that on the 5th of March when we announced the XL acquisition, we said that we would raise EUR 3 billion of Tier 2 debt. We did already EUR 2 billion under excellent conditions because we did it at [ 3.25% ] pretax, which means that the cost of tax will be 2% only. Then, we have some management action to reduce our equity rates, which led to 8 points positive impact. Maybe a few words about these. You know that we constantly seek to optimize a return on SCR, so we -- indeed, we reduce our exposure to equity ratio derivatives by [ budgeting ] put options. We captured the benefit from the relatively low level of volatility when we retain the upward equity movement. So that's mainly the reason why we did it. And as you know, we have 44% of equity exposure, which is roughly EUR 22 billion, and we did it on roughly 20% of our portfolio. So that's answer to your first question. The second is the solvency target range. So it's quite obvious that we are at the top end of the target range, but you can imagine that the acquisition of XL will put us back, I would say, comfortably within the 190% to 200%. So I'm quite comfortable to say that we will be within this range. Whether we change something on the payout ratio, there is no direct link with our payout ratio, but may I remind you that our payout ratio, we move from 48% to 49% this year. And we are not at the top of the range because the range still remains between 45% and 55%.

[Peter Eliot, Head of Insurance Sector Research]

Maybe just to come back quickly on the first question, I was just wondering if you could comment on the UFR drag in particular and what we should expect going forward. And also, the 20 points you mentioned, I mean, I'm just assuming that translates into 2.5 points of net for the quarter.

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

Yes, agreed. That's roughly 2.5% net. About UFR, we have a reduction of 15 basis points, which means that we are moving to [ 405 ], and the UFR represents roughly minus 2 points in term of solvency. And you know also that we have the reference portfolio. You know that the reference portfolio, that is used in order to calculate the volatility adjuster. It's on a recurrent basis, it's reviewed, and we had negative impact of minus 3 points.

[Operator]

Next question from Farooq Hanif from Crédit Suisse.

[Farooq Hanif, Head of Insurance Research in Europe]

I just want to go back to your comment about being comfortable about the 190% to 200% range post the XL deal. So when you first set that target, presumably, you didn't know what the impact of equity hedging would be, so your -- you're 8 points better on that basis following the hedging. So when you say comfortably, does that really imply that you're bullish about the range? That's my sort of questions or comment. Second point is, are there any major earnings implications of the equity de-risking that you've done. And third question is -- actually, I forgot the third question. Just those 2.

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

Okay. So Farooq, about your first question, you know that taking into -- first of all, it's a measure that has been taken -- hedging has been taken just in line with the present market conditions. So first of all, we consider that, whatever happened, it's sound capital management. At the time we announced the deal at the beginning of March, we knew that we would make some equity hedges because it made a lot of sense in term of capital management. So you cannot consider that it's 8 points on top, and -- so you can expect we will be within the range 190% to 200%, which is quite a sound range, meaning that I remind you that, at the end of '16, we were at 197%. So that means that we remain at the very front. We will remain with this transaction, hence, taking into account the IPO of the U.S. business. We will be in the -- at a very strong solvency level. You said the question about the impact of these hedging on earnings. I just would like to remind you that we ended up 2017 with this quite strong level of equity and realized gains because we were at a level of EUR 2.5 billion, so -- meaning that -- and that's also the reason why it made a lot of sense to move in this direction because for a limited cost, it's -- again, it's an excellent return on capital, so no problem because you know that we are realizing some capital gains. I don't expect that realization of capital gains will be lower due to this hedging, not at all. And so that's why, again, it's a good use of good management of capital.

[Operator]

Okay, next question from Andrew Sinclair from Bank of America Merrill Lynch.

[Andrew Sinclair, Vice President]

Just wondered if you could give us -- just 3 questions. Firstly, Asia sales, maybe a little bit weaker than expected this quarter. Hong Kong Protection sales, in particular, down 25% year-on-year seems a little bit disappointing. Just wondering if you could let us know what's happened here. Secondly, just wondered if you could give us an update on thoughts on recent DOL developments, which looked somewhat more positives for the industry. And thirdly, just wondered if you're able to give any commentary on XL's results, in particular, the shift in portfolio mix, increased use of -- amount of reinsurance on XL's reinsurance segment. Is that kind of in line with what AXA's proposing to do going forwards?

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

Okay. And -- so what I can say about Hong Kong, so that means that as far as Hong Kong, as you can see in the document, in the appendix, APE in Hong Kong grew by 3%. So we had the plus 15% in Health, which is quite good, and we did it mostly on group contract, which is absolutely in line with our strategy. At the same time, we had -- in Protection, we had some declines but no specific worry on this time. So that means that we have a business mix where we did more -- less Protection, more Health this quarter. By definition, it has an impact on the NBV margin. But at the same time, I should remind you that we still have a very sound and high NBV margin, that 44% in Hong Kong. So it's quite obvious that we have a competitive market over there, but you remember that we have to do the right balance, to strike the right balance, which means volume and profitability. We had a very strong profitability at level around 60% up to now and especially last year. We are back at the level of 40%, 44%, which we consider is good and which is -- which allows us to be positive, and you can expect us to still remain positive territory in Hong Kong this year. So that's for the first-- from your first question. About the second one, about the DOL, so I believe that -- if I could say, the situation in the U.S., that -- we have an APE growth of 3%, but this APE growth would have been higher if the reference wouldn't be Q1 last year. Why? Because in Q1 last year, it was just before the DOL, and at that time, we had strong sales in anticipation of DOL. So that's means that -- to answer more precisely your question, so that means that the underlying trend is above 3%, which is good. And second, it means that, indeed, the DOL impacts are quite good with the recent events, which means that the DOL impact will be much weaker than what we could see some time ago. About XL and XL...

[Andrew Sinclair, Vice President]

Sorry, Gérald, just before you move on, I was more looking for a commentary on the announcements over last few weeks from regulators and government in the U.S., suggesting maybe the DOL is being ruled back to some extent. Just wondered if you'd give any thoughts on that.

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

Well, I believe that I cannot be more precise. It's a good decision. It's a good -- it should be a good outcome. But I don't, frankly, anticipate it. That's only my point. So yes, it's good, so it's upside for us. But how far it will translate, how quickly it will translate into our figures, I cannot be more precise. That's my only -- that's the limit. But yes, it goes in the right direction. But I don't want to over sell it, and that's why let's wait. But it's a good for the U.S. business, and at the time, we do the IPO, it's a good news. Okay? So about XL, so I would say that XL -- first of all, I would like to say that we are still legally constrained in what we can publically discuss about XL. You know that you can refer to their press release and their earnings. But what I can tell you is that they published solid Q1 results, and they were in line with their expectations. So I would say no surprise. What I could you tell you, their top line grew at constant FX by 4%, which is a good news. It's partly supported -- and this is important. It's partly supported by an increase in both insurance and reinsurance, plus 3.3% increase in rates in insurance, plus 4.3% increase in rates in reinsurance. I just would like to add one technical point. So the effect of price increase on earnings could not be visible in Q1. Why? Because you know that it's -- the earnings are coming from earned premium. And so that means that it will take time before this rate increase will flow into the earnings. But that's a good news. Second, I could say that management of XL is taking some strategic initiatives to shift the portfolio mix toward low volatility and then move to higher cap protection. It was absolutely in line with what they announced. And I would say that, just to conclude, that from their press release, significant improvements. You saw significant improvements in the operating net income in Q1, and again, it was in line with management expectations. That's what I can tell you, so it's no surprise I would say.

[Operator]

Okay, next question from Mr. Nick Holmes from Societe Generale.

[Nick Holmes, Equity Analyst]

Just one question. I wondered, how concerned are you about the French banks saying that they want to write more P&C business in France. Is this much of a threat?

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

So I would say that it's not new. So it's still -- we have a quite competitive environment. Most -- as you can see in the press release, in Motor in France, we had also -- we had some positive price increases nevertheless. We are -- in personal motor, we were at minus 4%. So yes, there is a competitive environment. I believe and I don't expect that we will stay at such a level of minus 4%. And we are taking some measures in order -- and it's not decreasing our profitability. It's more segmentation, some incentive that could be given to the sales force, which means that we can expect to have an improvement in the course of the year. But nevertheless, it's obvious. We [indiscernible]. We have more competition in France. At the same time, may I remind you that we have a strong and good and sound profitability throughout P&C in France, whatever the products, including motor and individual motor, which means that -- and which is not the case of the whole market. May I remind you that the whole market is [ far above by metric ], which is not our case. So nevertheless, in the end, I'm quite happy in France with the global group plus 2% revenue, which means that we can be extremely profitable going on improving our profitability while growing the top line.

[Operator]

So next question from Oliver Steel from Deutsche Bank.

[Oliver George Nigel Steel, Managing Director]

Three questions. So first is just coming back to the equity hedging. How long -- I mean, you said that it was a reaction to present market conditions. So how long is the hedging actually in place for? And perhaps linked to that, you could give us the new equity sensitivity upwards and downwards on your solvency? Secondly, I mean, you've produced some extremely good growth numbers in the French Life and Savings business and Health. How much of that -- I mean, that feels as if it's a bit of a sea change relative to, I mean, even some pretty good numbers last year. I'm just wondering how sustainable that sort -- those sort of growth numbers are. And then the third question, because I didn't talk to you at the time, you released or you're going to release something like CHF 2.5 billion of capital, I think, from the Swiss Life business, but you've also -- I think, you've also released an equivalent amount of reserves. And I'm just wondering what the net solvency effect will be from that at the group level.

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

So first, how long -- your first question, the equity hedging, how long. So what we did is we did quite long, 2 years equity hedging. Why 2 years? Because in order to benefit from the solvency, we should have quite some visibility and we should have at least 1 year visibility in order to have the full benefit in term of solvency. So to make it clear, it's more rational to do long-term hedging. What's the new equity sensitivity? We can calculate it. It's -- I give you just a quick guideline. As I told you, we hedged 20%, and it's 20%, which has been hedged at -- so that means that you could imagine that, more or less, we can -- you can reduce by 20% the sensitivity. It's maybe slightly higher, but that's what you can keep as a good guideline. The French -- your second question was about the French Life & Savings. So yes, we had a very good start with some contracts and some good contracts, international contracts in Health. It's a good start. We still are expecting to have a strong growth this year in France. I -- nevertheless, I just wanted -- and I'm sorry to mix the [ titration ], Oliver, but I just wanted to highlight one point. On the APE side, we are posting plus 5%, okay? But look at China. If I exclude China, we would have been at plus 8%, which confirms its very strong start and the strong expectation. And it's not a new -- a strong start. We hope that this year will be good in term of Life growth. As far as Swiss business is concerned, yes, that's what we announced. And we announced on April 10 that we would release CHF 2.5 billion of capital over 3 years, and this is linked to Swiss solvency test. So that means that -- it means that the Swiss solvency test, as you know, is much tougher than the Solvency II test, which means that the global group solvency in term of Solvency II might be what offsets something like this. So it will be much smaller. But in term of capital and cash, we'll -- effectively, we'll collect, and it will be good for the remittance ratio. We'll get CHF 2.5 billion, which will be upstream to the holding company.

[Operator]

Next question from Andrew Crean from Autonomous.

[Andrew John Crean, Managing Partner, Insurance]

Couple of questions and a request. Just going back on the de-risking, do you intend to do more than 20% in the [ XL ] portfolio at some point in time? And after 2 years, I assume you would intend to reload. Then secondly, on the Personal lines pricing, obviously, just over a year ago, rate -- Personal lines rates were rising about 4% and now rising about in 1%. Do you think that has implications for your cost stability? I.e. do you hope to maintain average claims of growing by 1%? And then a request, given the multi-actions you've taken both in XL and the IPO of the U.S. business, would you, at some point in time, be able to give us a sort of pro forma balance sheet so that we can work out the tangible equity moves and the impact on debt gearing because it's quite difficult to do from the outside?

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

Okay. Let's start, Andrew -- let's start with the de-risking. So do we have an intention to do more? Not today. So that means that we consider that it's a good level, and we presently don't have our intention. It doesn't mean that we could not change our mind because it depends, of course, on the economic condition. It depends also on the cost of volatility as you can imagine. Your question, which is good, do you intend to reload at the end of the 2 years, it will depend on the equity markets, and -- but roughly speaking, what guided me in this decision was just to say that we had the strong volumes of the equity market over the last years, and it was a way to secure part of the capital gains while being extremely effective in term of capital management. The Personal pricing, again, I see your point. And does it mean that we will reduce our profitability? No, it's not our intention. And that's the reason why we were in France to -- when we were at minus 4% in term of top line for individual motor at the beginning of the year. We don't intend to reduce our profitability, and we don't believe because you know what -- I remember -- I remind you that we have some objectives in term of -- at the end of our plan, in term of combined ratio, to be between 94 and 95, and we'll stick to it. So we could from time to time adjust the top line because we have to keep a certain level of profitability. But the price increase is not the only driver because we have also the claims management, and we have also fraud and all different drivers that we can use in order -- fighting fraud, leakage and so on that we can use in order to keep a strong profitability. So no worry on that side. Your last question, first of all, I just would like to -- because I take this opportunity. You all read that we intend to launch a mandatory exchangeable. That was our -- that was what we announced last week. And this mandatory exchangeable, some of you believe that it would be considered as a debt. Indeed, it's a bit technical, but the net present value of the future interest rates that will be paid will be considered as a debt. But the principal will be in minority interest. So -- and that's quite logical because it's mandatory, so it's not a convertible at the option of the holder. It's mandatory redeemable bond, redeemable into share, into AXA Equitable Holding share. So that's the first point. Second point, at what time we will -- I believe that we will -- we'll wait. Let's wait for the event. Next week, we should have the pricing of the IPO, but as soon as feasible, of course, we will update you with some elements so that you could have a sound view of our balance sheet and our -- and of our debt gearing. So it will be an update of what we presented on the 5th of March.

[Andrew John Crean, Managing Partner, Insurance]

Gérald, one follow-up question, I guess. Is the mandatory convertible part of your EUR 3 billion of debt financing? So the...

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

No.

[Andrew John Crean, Managing Partner, Insurance]

It's not, so there's another billion [ still to wait ].

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

No, it's not part of it. It's not part of it, but just -- I would like just to tell you that, first of all, when we -- the mandatory is a way to reach alternative investors, long-term investors. So it's one -- it's a technical -- it's a product, which is on top of the traditional IPO. But again, no, it's not -- it won't replace the EUR 2 billion -- the EUR 3 billion -- EUR 1 billion of the EUR 3 billion debt. For the time being, it's not planned like this.

[Operator]

So next question from Michael Huttner from JPMorgan.

[Michael Igor Huttner, Senior Analyst]

Just going back to the Solvency. My math is probably really wrong, but as we can see, you've given the 7 points from the debt, 8 points from the hedging, so that's 15. Then, there's a couple of 1 -- there is minus 3 and the minus 2 linked to the UFR on the chain in volatility adjuster and a plus 2 or something from the operating profit contribution. So that gives me a figure of 12, and you actually improved by 16. So just wondered maybe you can talk about the other bits. That would be lovely. And then I think the opening question alluded to that and you kind of alluded to that, but I just wondered if you maybe can give a bit more color on that. So on the Swiss announcement, you said that the kind of profit impact in the first half of about CHF 400 million, is that also the gain that you've made on the hedges, which will come through? And the gain on the hedges, will they come through in the underlying, in adjusted or net profit? And the final question, and I'm -- you probably think I don't know anything, and that's probably true. But your solvency, so you include the U.S. on the equivalents. Is -- once you've sold a portion of the U.S., does that reduce the solvency requirements and the solvency numbers in the U.S. pro rata? Or do you have to -- nothing change until you actually reduce to below 50%?

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

I'll start with the last question first. Yes, it will be pro rata. So that means that it will be pro rata depending on the percentage that will be sold. About the solvency, which is your first question, so I said that, in fact, we have the 3 main elements. We have the operational return -- operating return, which is a bit more than 2%. Then, we have the [indiscernible] 7% and then we have different elements, plus -- which is the hedges that we discussed just before. And we have plus and minuses, which, as a whole, makes that -- this block represent 7%. So it's -- the management actions, I would say, are -- correspond to plus 8%. And then we have some negatives, but also, we have some small positives coming from the various elements. And very often, we are dealing with elements that could be extremely small and will be some small positives. Next is the -- so your second question was?

[Michael Igor Huttner, Senior Analyst]

And so that was -- my second question was fishing really. You said CHF 400 million is the cost of the Swiss thing in terms of net earnings, and I was wondering, the hedging -- the gain you've made on the hedges, where will it appear in the profit and loss, which level of earnings. And is it roughly equivalent to this CHF 400 million?

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

I'm sorry, I don't understand your question.

[Michael Igor Huttner, Senior Analyst]

So let me -- so you've hedged 20% to your equity portfolio, so -- and equities in Q1 went down, so you've made a profit. And my question is where does the profit appear. And in size, is it roughly the same order of magnitude as the CHF 400 million cost of the Swiss thing?

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

Okay. So long as you are -- you buy put, the exact value of this put, which has increased, so that's the mark to market of your put. This mark to market will flow in net income. And at the time you will realize it, it's the option to use the money to release some intrinsic value, and this intrinsic value should flow into the adjusted earnings. That's the way it will work. I hope I'm clear. Tell me if I'm not and...

[Michael Igor Huttner, Senior Analyst]

Yes, yes. No, that -- the accounting is clear. But you made a profit in Q1, where -- and I mean, I'm sorry. Where will it go?

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

So I don't publish -- let's be clear. We don't publish our earnings in Q1. So it's [ 8 ], there are plus and minuses, so you have -- and -- but anyway, you can expect -- again, you can expect it have -- to get it in the -- in your earnings net income at the end of H1, so we'll discuss it at the end of H1.

[Operator]

So next question from James Shuck from Citi.

[James Austin Shuck, Director]

Three from me this morning please. Firstly, returning to the XL earnings reported yesterday. I can appreciate you can't really comment on the direction of travel and you're kind of legally impeded on saying some things. But I'm just struggling a little bit with the ROE of XL. It's a 9% ROE based on a 95% combined ratio. There's a reasonably high level of debt gearing in that company, and there's also quite high level of investment risk. And the 95% combined ratio, from what we've seen from the earnings, any improvement in the underlying is actually being offset by a reduction in the volatility. So could you just clarify for me how you actually see that ROE improving and why you're confident it will? Secondly, a kind of more general question. Looking at your Life sales in Europe, you seem to be controlling those very nicely. You've seen a decent growth in the Protection side and in the Health side, particularly in Europe. I'm just wondering about how reliant that distribution is on commissions in particular because we have the insurance distribution directive that goes live in October, and I'm just interested to know how that will play out amongst your tight Asian network. Final question just around the Solvency II ratio. I kind of return a little bit to Michael's point. Let me try not -- add up all the numbers and work out to what's changed in the quarter. I mean, you say that the 4 points of kind of unexplained difference is due to small positives kind of all being cumulative. But that's bigger than your operating earnings in the period, so a little bit more color around actually what changed in that Q1. And then looking forward over the rest of the year, can you anticipate any modeling changes, management actions or an impact from any changes around the EIOPA calibrations on that Solvency II ratio?

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

Okay. So starting first with your question, first of all, about XL, the ROE, so you can notice the ROE, that the published were -- was above 9%. I believe -- and that's why I said no surprise because it's quite in line with the -- quite in line with what they expected. I remember that when I presented in March, beginning of March the acquisition, we said that we should be close to 10%. And I said no surprise because, indeed, they are at the right level -- at the level of profitability that, indeed, they were expecting. About the investment -- and then I'll stop because I'll go beyond what I'm allowed and entitled to tell you. But in investment, I encourage you to go through their disclosures because, honestly, their investment portfolio is extremely safe. So -- and I'm quite relaxed and -- on that side, and I don't consider at all that their portfolio is aggressive at all. On your second question, which is, if I'm right, your question about the insurance and this condition that I see, and we are ready for this. That means that it's something that we are anticipating. And we don't have any specific fear on that side, and we don't expect that they would be any decline in our sales following the implementation. Your last question, so it's a -- we start from 205%. Starting from a solvency position at 205%, we have an operating return. With rounding, it's plus 3 because, and as I said before, it's 2.5. So we have the debt, the EUR 2 billion of debt that we issued. That's plus 7, and then we have the hedge, which is plus 8, and then we have UFR, plus VA, which represent minus 2. Indeed, I'm -- I was wrong when I said -- to answering your previous question, I said minus 2 for UFR and reference portfolio minus 3. In totality, I'm very sorry for this. So we can -- we are between minus 2 and minus 3 for the combined effect of these 2. Sorry for that. So that's why you had -- I introduced a bit of confusion, and so if you can't, 3 plus 7 plus 8 minus 2, you are 221%. I hope that it's clear now.

[James Austin Shuck, Director]

Okay. I mean, I guess, that -- why is the UFR impact so much less than previous guidance, I suppose, would be the question from that.

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

No, no, no, I maintain that we are what -- the combined effect should be minus 3. So that's -- no, no, that's in line with what we -- it's -- this is the calculation, and this is what -- where we'll end up.

[James Austin Shuck, Director]

What would be the annual drag from the UFR going forward, please?

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

But -- the UFR, so long as you have this -- the impact on the UFR in one [ shot ], so that means that it will be exactly the same for the whole year because you have a minus -- so long as you have an effect, an impact, which is an impact, which is -- which has been taken a 15 basis points in the first quarter, so the next effect will be the year after. I won't be this year. So it will be exactly the same.

[Andrew Wallace-Barnett]

Yes. I think, James, we can take that offline with you. I suspect that probably the UFR estimates that you guys have been doing is probably quite accurate. I think it's the reference portfolio that's a bit harder to model, and we'll try and see if there's something we can give to everybody to help that to be easier to estimate in the future. And of course, the reference portfolio is something that changes annually.

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

Anyway, as explained by Andrew, so that's mean that we want to be absolutely transparent on this. And if you need any more guidance or explanation, don't have any fear. We'll give it.

[James Austin Shuck, Director]

Sure. Okay. And just to be clear, with you, it -- are there any foreseeable modeling changes or management actions, et cetera, for the rest of the year?

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

No, for the time being, I don't expect such type of action.

[Operator]

Next question from Colm Kelly from UBS.

[Colm Kelly]

Just one question on new business margins. So the new business value margin was flat year-on-year in 1Q, and it's lower than the full year despite the continuation of the business mix shift. So at full year, I know you were confident around the progression of that margin and the scope for that to continue to grow. So is the impact we're seeing in 1Q just a bit of short-term seasonality? Or is there anything within that number that would indicate that big margin expansion is largely complete going forward? And then the reason I ask is, obviously, the margin expansion has been key to the new business value growth to date, and that's obviously key to maintaining future cash flow growth for that Life business. So it's quite important to understand where the driver of that is going to be going forward.

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

Okay. So first, we are at 42%, which is extremely strong. And when you compare ourselves with our peers, first of all, I would like to say that we are far above our peers in term of profitability. Of course, it depends on the business mix. You notice that there are plus and minuses. As I mentioned, roughly, we are flat in France. I don't expect that France will move a lot. In Europe, we could have some improvements coming progressively from Switzerland because the fact that we will move to semi-autonomous means that, normally speaking, we should have an increase in the NBV margin in Switzerland. In Italy, you notice that we made -- we benefited from a strong recovery and so long as we are going quite fast in [indiscernible], maybe we could have a slight improvement on that side. So on Europe, I would say, maybe it could go on slightly increasing. In Asia, I would be cautious. In Asia, I would be cautious because we are already at 58%. In China, we are above 50%, meaning that we will stay most probably at the same level. In Japan, we're around 100%. We can expect to stay at this level. When you are at 100%, it's difficult to do better. And in Hong Kong, we are at 44%, so it's a balance between growth and profitability that I explained before, so I believe that we will be stay much more at 45% around and 60% like last year. In the other high potential, we are at 49%, so we should stay there. Maybe we could slightly improve, but that's [ costly ]. As far as the U.S. is concerned, we are around -- we were at 23%, 22% flat, and we can expect to remain flat. So I don't expect to make it short. I don't expect -- we will keep a strong level of NBV margin. We have some elements that could let us believe that we could have some improvement, but I believe that it should be marginal because we reached the level of profitability, which is extremely strong. And as you can imagine, we will try to grow the top line sales on this high level of profitability.

[Operator]

So next question from Johnny Vo from Goldman Sachs.

[Johnny Vo, Managing Director]

Just -- guys, just in terms of the hedge, where in the group have you purchased the put options? Is it in the holding company? And where is the shareholder exposed equity in the group? In which entities is it in? Also, the strike of the puts, I -- have you brought at the money or out of the money? And how far out of the money? And finally, what is the premium cost for that put option?

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

Okay. So it's really precise. First, about the hedge, it's in the holding company. Second, the strike, we bought 10% out of the money option. A soft question, what's the premium? So premium is roughly 5% pretax for a 2 years option.

[Johnny Vo, Managing Director]

Okay. So just, therefore, if the hedge is in the holding company, I guess, it changes. Because you've released capital, it doesn't change the remittance profile of your subsidiaries though because each subsidiary...

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

No [indiscernible] sorry, I see your point, but I would say that I remind you that the companies will see [ a quite ] strong France, for example, has a strong equity exposure in P&C just like it would be in the holding company. So that means that it's -- it won't change the remittance ratio of the companies. The only point is it's easier to manage from the practical point of view because when you have a such type of hedging, you have to manage your collateral and so on, and it's easier to do it in the holding company. No more reason than this one.

[Operator]

So next question from Mr. Michael Huttner from JPMorgan.

[Michael Igor Huttner, Senior Analyst]

This is a slightly strange question. So one of your European competitors with a very large U.S. variable annuity business, they have, obviously, hedges to that variable annuity business, which means that when equity markets go up, the hedges lose value. And that eats into their reserves, which means that, at some stage, the reserve becomes 0, and then it becomes a problem. Is there anything like that in your business model?

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

No. Relative to the U.S., yes, we have -- I remind you that we are in a situation today where most of the equity in the U.S. are hedged and where we keep an open position on the interest rates, which is collectively good position. Why? Because interest rates are going up. So as they went up -- so I'm quite happy to have this underlying position. As far as the -- it's the RBC in the U.S. We have an excellent RBC position so that we are above 600%, so that's -- I don't have any such fear even if there would be bigger moves on the equity market. So honestly, I don't have such type of fear. You remember that when I presented the plan, it was in November. I said that we would be at least at 500%. We are far above this level, meaning that we have a significant buffer.

[Operator]

We don't have any more question for the moment. [Operator Instructions] We have a new question from Mr. Pierre Chedeville from Crédit Suisse CC Market Solutions (sic) [ Crédit Mutuel-CIC Market Solutions ].

[Pierre Chedeville, Analyst]

I have 2 quick question. The first question is at a -- I recently read that -- in Italy, the fact that MPS is -- belongs to a public sector, it could be prohibited to sell insurance products. And the IVASS, which is a supervisor in Italy, consider it as an anomaly so far. So what is your view regarding this potential evolution of the regulation that could impede your strong recovery in Italy through BMPS? And my second is how do you see the evolution of the P&C business in France? Considering the stronger and stronger competition from the banking sector, what, in your view, are the measures that you can take to fight against this new competition and I would say, much more aggressive competition in the P&C, not Life, which is not competition, I would say, but in the P&C business more specifically?

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

Okay. Relative to your first question, so that's about the MPS. Remind you that we renewed our agreement -- our bank insurance agreements with MPS for 10 more years. Second, it's a 50-50 partnership, meaning that we participate to the recovery of the bank, which means that it's a strong contributor to the earnings of the bank. And so it's the direct interest of the bank to go on selling it. I remind you at the same time that the shareholder being the state, it's the interest of the state to keep this bank insurance business because it will be part of the recovery of the bank. So I have no specific fear on that side. And you notice again that -- I remind you, we're really proud to announce that our Unit-Linked business in term of -- it grew by 42% in the first quarter, which highlights this strong recovery in the market. About the P&C business, I believe that it's by different measures, so it's more by segmentation, by favoring some cross-sell, for example, that we have. There's a possibility to grow more this -- the top line of our P&C business, the P&C business in France. But in the, again, personal non-motor, we were at 0. We can expect to recover with more household insurance. And on personal motor, as I said, answering your previous question, I believe that minus 4 is very low and that we will do better in the rest of the year. So we have different measures but which are traditional incentives that are given to the networks and selling incentive also to sell some combined product and to cross sell products between motor and nonmotor.

[Operator]

So the next question from Mark Cathcart from Jefferies.

[Mark David Cathcart, Equity Analyst]

It's Mark Cathcart from Jefferies. I think you mentioned that post XL your gearing ratio would be somewhere between 31% and 32%. If I take the convertible that you're raising of EUR 750 million, that's worth about 1 point on that debt ratio. So can you confirm that the debt ratio guidance is still within that 31% to 32% range but likely at 32% because of the convertible? Or is there any risk that it could go above 32%?

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

All I can say is that we have no reason to go above this level. Second, Mark, I confirm that this convert -- this mandatory convertible will not be [ back ]. Only a small part of it will be considered as debt. The [ debt maturity ] will be considered as a minority interest and again, it's a not a debt. It would be a debt -- it would be up to the holder to decide whether they will convert or not. So long as it's a mandatory, it means that whatever happens, after a while, you will convert this debt into equity. So that's quite logical that it's not considered as a debt. And -- so that's the point. So no -- to make it clear, I have no fear that we would go above the guided -- well, above the guidance that we gave you. So no, not at all, not at all.

[Andrew Wallace-Barnett]

Just to be [indiscernible], Mark, the NBV is roughly neutral for the gearing ratio.

[Operator]

Next question from Michael Huttner from JPMorgan.

[Michael Igor Huttner, Senior Analyst]

Sorry, last question. In Germany, you had this lovely growth in personal motor and personal nonmotor of 3% and 4%. And is this mainly price? Or is this mainly volume, please? And just to gain a feel for where pricing is moving, I guess, because you said the pricing in France up 1%, and I just wondered in Germany.

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

Okay. Maybe you can -- we can go to Page 14, Michael, of the press release. You will see that on Personal lines, we had 1.2% price increase, which is more or less in line with our own expectations. So if your question is do you expect -- still expect to have such type of price increase, yes, I believe that from talking to a maximum, for other lines, we have much more flexibility. But again, I repeat what I said. We have -- and again, I'm not at all worried by the global effect on our P&C business. I repeat what I said. But in France, yes, we have a situation where the Motor business -- individual Motor business is under pressure from -- under competitive pressure and coming mostly from the bank insurers but also from the mutuals. I remind you and I repeat that the average combined ratio in France would be at [ 105 ], so it's 1 point. About Germany, the price effect -- the average price effect in Personal lines for Germany is 2.4%., so we still [ have accounted ] where we keep a strong price effect. And at the same time, in Germany, we have a volume effect of plus 1, so that's a -- in Switzerland, we have a volume effect of plus 1, so this in Spain, 1; Italy, 1.1. So we have a specific test in France, but then Italy, in most of the other countries, it's not only driven by the price effect. It's also the volume effect, which is positive.

[Operator]

So next question from Andrew Sinclair from Bank of America Merrill Lynch.

[Andrew Sinclair, Vice President]

Sorry, just one final question from me. Just wondered if you can confirm for the mandatory convertible what are the terms under which AXA can compel conversion prior to maturity of the bond.

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

Okay. Of course, Andrew, I cannot answer your questions because it's a point, which is -- and that I cannot disclose for the time being. And it's -- what I could say that you can see and the best way for you is to look at the other mandatory convertibles that have been issued, and you will see what are the comments, finally show the features, so that you will see how it works. But it's not very complex. It's a mandatory convertible. It's -- at the end, there is a -- it's just a loan, and after you have a mandatory conversion and this mandatory conversion, you have a flexibility in the number of shares that you give because if there is a price appreciation, then the holder will get less share because there is a value appreciation. So in other terms, it's just like you would buy a call option that I'm seeing like this. And it's -- that's mostly -- but honestly, I -- my advice would be to -- for you to go through documentation of other type of mandatory like this. It's extremely simple. The fact that it's interest investors, that's when you are long-term investors when you are sure that you will stay a long period of time, it could be interesting because, of course, in exchange for this option, you have a higher return and you have a coupon, which is higher.

[Operator]

We don't have any more questions. [Operator Instructions] We don't have any more questions. Back to you for the conclusion, sir.

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

Okay. So I thank you a lot for this call. So I was happy to have this exchange with you, and I'll speak to you soon. Thank you.

[Andrew Wallace-Barnett]

Have a good day.

[Gérald Harlin, Deputy CEO & Chief Financial Officer]

Have a good day. Bye-bye.